Facebook and its underwriters cannot escape the class action lawsuit that claims the company hid several material information about its health prior to the $16 billion initial public offering (IPO) in May 2012, a US District judge has said.
Almost immediately after Facebook's IPO, the company found itself in the thick of legal battles that are yet to be resolved. The problems emerged after the company's stock, which opened at $38 per share on NASDAQ, took a nosedive after a few days. Angry shareholders sued the company for failing to disclose the details regarding "severe and pronounced reduction" in forecasts of the company's revenue growth.
When the IPO opened on May 18, 2012, Facebook shares traded at $38. The price immediately went up to $45 per share during the day but dived soon after. The shares hit rock bottom at $17.55 on Sept. 4, 2012, making many investors lose millions of dollars. The company's stock began recovering from July 25 this year.
The lawsuit claims Facebook should have disclosed to investors, prior to its IPO, internal projections on how increased mobile usage and product decisions might reduce future revenue. According to the court filings, the social network giant negligently concealed material information from its IPO registration statement that it had provided to the analysts of its underwriters viz. Morgan Stanley, Goldman Sachs and JPMorgan Chase & Co.
"The company's purported risk warnings misleadingly represented that this revenue cut was merely possible when, in fact, it had already materialize, said Judge Robert Sweets of U.S. District Court in Manhattan. "Plaintiffs have sufficiently pleaded material misrepresentation(s) that could have and di mislead investors regarding the company's future and current revenues."
Facebook "should have disclosed more" to investors how increased mobile use was affecting sales, but the company instead "used generalized and indefinite terms" in its registration and so-called free writing prospectus, the judge opined.
The current lawsuit is one of the 42 lawsuits that are being overseen by Sweet. In February, Sweet dismissed several of these lawsuits, ruling that Facebook was not obliged to to release its revenue growth forecasts, as it had already "made express and extensive warnings" regarding the obstacles to its mobile business. However, Sweet said Facebook still has to face the remaining lawsuits, including this one which has been filed by investors including pension funds in Arkansas, California and North Carolina.
"We continue to believe this suit lacks merit and look forward to a full airing of the facts," Facebook said in a statement. The lawsui names Facebook CEO Mark Zuckerberg and COO Sheryl Sandberg as the defendants in the case.
The banks also said they will contest the lawsuit.
Shares of Facebook were trading down 1.91 percent at $54.51 on the NASDAQ on Thursday afternoon.
